CHARLES RIVER LABORATORIES INTERNATIONAL INC - 10-Q Quarterly Report

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UNITED STATES
SECURITES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2002
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 333-92383

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
(Exact Name of Registrant as specified in its Charter)

DELAWARE
(State of Incorporation)

06-1397316
(I.R.S. Employer Identification No.)

251 BALLARDVALE STREET, WILMINGTON, MASSACHUSETTS 01887
(Address of Principal Executive Offices) (Zip Code)

978-658-6000
(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

As of October 18, 2002 there were 45,132,882 shares of the registrant's common stock outstanding

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

FORM 10-Q

For the Quarterly Period Ended September 28, 2002

Table of Contents

			Page
Part I. Financial Information
	Item 1.	Financial Statements
		Condensed Consolidated Statements of Income (Unaudited) for the three months ended September 28, 2002 and September 29, 2001	3
		Condensed Consolidated Statements of Income (Unaudited) for the nine months ended September 28, 2002 and September 29, 2001	4
		Condensed Consolidated Balance Sheets as of September 28, 2002 (Unaudited) and December 29, 2001	5
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 28, 2002 and September 29, 2001	6
		Notes to Unaudited Condensed Consolidated Interim Financial Statements	7
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
	Item 4.	Controls and Procedures	25
Part II. Other Information
	Item 6.	Exhibits and Reports on Form 8-K	26

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(dollars in thousands except for per share data)

		Three Months Ended
		September 28, 2002			September 29, 2001
Net sales related to products		$	74,158		$	64,094
Net sales related to services			67,206			59,591

Total net sales			141,364			123,685
Costs and expenses
	Cost of products sold		41,663			38,050
	Cost of services provided		46,226			42,424
	Selling, general and administrative		20,023			17,016
	Amortization of goodwill and intangibles		933			2,183

Operating income			32,519			24,012
Other income (expense)
	Interest income		427			360
	Interest expense		(2,289	)		(5,456	)
	Other income (expense)		(48	)		83

Income before income taxes, minority interests, earnings from equity investments and extraordinary item			30,609			18,999
Provision for income taxes			11,041			6,677

Income before minority interests, earnings from equity investments and extraordinary item			19,568			12,322
Minority interests			(717	)		(643	)
Earnings from equity investments			57			126

Income before extraordinary item			18,908			11,805
Extraordinary loss, net of tax benefit of $236 and $691, respectively			(377	)		(1,284	)

Net income		$	18,531		$	10,521

Earnings per common share before extraordinary item
	Basic	$	0.42		$	0.27
	Diluted	$	0.39		$	0.26
Earnings per common share after extraordinary item
	Basic	$	0.41		$	0.24
	Diluted	$	0.38		$	0.23

See Notes to Condensed Consolidated Financial Statements

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(dollars in thousands except for per share data)

		Nine Months Ended
		September 28, 2002			September 29, 2001
Net sales related to products		$	217,186		$	186,816
Net sales related to services			194,499			152,720

Total net sales			411,685			339,536
Costs and expenses
	Cost of products sold		120,814			108,256
	Cost of services provided		135,037			107,637
	Selling, general and administrative		62,329			49,761
	Amortization of goodwill and intangibles		2,194			6,004

Operating income			91,311			67,878
Other income (expense)
	Interest income		1,637			959
	Interest expense		(9,152	)		(18,354	)
	Other income (expense)		1,029			516

Income before income taxes, minority interests, earnings from equity investments and extraordinary item			84,825			50,999
Provision for income taxes			32,185			19,891

Income before minority interests, earnings from equity investments and extraordinary item			52,640			31,108
Minority interests			(2,098	)		(1,859	)
Earnings from equity investments			316			345

Income before extraordinary item			50,858			29,594
Extraordinary loss, net of tax benefit of $11,651 and $1,671, respectively			(18,231	)		(3,104	)

Net income		$	32,627		$	26,490

Earnings per common share before extraordinary item
	Basic	$	1.14		$	0.74
	Diluted	$	1.06		$	0.68
Earnings per common share after extraordinary item
	Basic	$	0.73		$	0.66
	Diluted	$	0.70		$	0.61

See Notes to Condensed Consolidated Financial Statements

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

			September 28, 2002			December 29, 2001
			(Unaudited)
Assets
Current assets
	Cash and cash equivalents		$	112,389		$	58,271
	Restricted cash			5,000			—
	Trade receivables, less allowances of $2,345 and $2,119, respectively			98,718			98,478
	Inventories			41,921			39,056
	Prepaid expenses and other current assets			15,892			14,349

		Total current assets		273,920			210,154
Property, plant and equipment, net				174,548			155,919
Goodwill, net				78,650			52,087
Other intangibles, net				28,274			38,287
Investments in affiliates (Note 3)				—			3,002
Deferred tax asset				77,128			87,781
Other assets				23,788			24,132

		Total assets	$	656,308		$	571,362

Liabilities and Shareholders' Equity
Current liabilities
	Accounts payable		$	10,917		$	13,868
	Accrued compensation			28,185			25,736
	Deferred income			22,062			22,210
	Accrued liabilities			31,726			28,899
	Other current liabilities			8,009			7,819

		Total current liabilities		100,899			98,532
Long-term debt				188,512			155,506
Capital lease obligations				76			361
Accrued ESLIRP				11,946			11,383
Other long-term liabilities				5,100			3,082

	Total liabilities			306,533			268,864

Commitments and contingencies (Note 10)
Minority interests				16,935			12,988
Shareholders' equity
	Preferred stock, $0.01 par value; 20,000,000 shares authorized; no shares issued and outstanding			—			—
	Common stock, $0.01 par value; 120,000,000 shares authorized; 45,092,784 and 44,189,650 shares issued and outstanding at September 28, 2002 and December 29, 2001, respectively			451			442
	Capital in excess of par value			599,086			588,909
	Retained earnings			(250,541	)		(283,168	)
	Loans to officers			—			(341	)
	Unearned compensation			(2,629	)		(316	)
	Accumulated other comprehensive income			(13,527	)		(16,016	)

		Total shareholders' equity		332,840			289,510

		Total liabilities and shareholders' equity	$	656,308		$	571,362

See Notes to Condensed Consolidated Financial Statements

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(dollars in thousands)

			Nine Months Ended
			September 28, 2002			September 29, 2001
Cash flows relating to operating activities
Net income			$	32,627		$	26,490
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			17,381			19,191
	Amortization of debt issuance costs and discounts			1,445			1,126
	Non-cash compensation			582			21
	Provision for doubtful accounts			158			—
	Extraordinary loss, net of tax			18,231			3,104
	Earnings from equity investments			(316	)		(345	)
	Minority interests			2,098			1,859
	Deferred income taxes			18,353			12,274
	Windfall tax benefit from exercises of employee stock options			3,005			1,204
	Loss on disposal of property, plant, and equipment			1,529			234
	Other non-cash items			—			217
Changes in assets and liabilities:
	Restricted cash			(5,000	)		—
	Trade receivables			3,383			(23,861	)
	Inventories			(112	)		(3,679	)
	Prepaids and other current assets			(1,085	)		(2,131	)
	Other assets			703			(1,660	)
	Accounts payable			(4,633	)		(4,407	)
	Accrued compensation			1,606			5,619
	Deferred income			196			4,818
	Accrued and other current liabilities			(2,859	)		(6,375	)
	Accrued ESLIRP			563			715
	Other long-term liabilities			1,136			(937	)

		Net cash provided by operating activities		88,991			33,477

Cash flows relating to investing activities
	Capital expenditures			(21,614	)		(20,530	)
	Contingent payments for prior year acquisitions			—			(250	)
	Acquisition of businesses, net of cash acquired			(22,046	)		(55,265	)

		Net cash used in investing activities		(43,660	)		(76,045	)

Cash flows relating to financing activities
	Proceeds from long term debt and revolving credit facility			188,922			45,254
	Payments on long-term debt and revolving credit facility			(155,144	)		(68,137	)
	Payments of deferred financing cost			(6,123	)		(984	)
	Payments on capital lease obligations			(71	)		(4,142	)
	Proceeds from issuance of common stock, net of transaction fees			—			116,691
	Proceeds from exercises of employee stock options			2,150			1,003
	Proceeds from exercises of warrants			2,136			—
	Premium paid on early retirement of debt			(23,886	)		(1,811	)
	Dividends paid to minority interests			(1,470	)		(729	)
	Payments received from officer loans			341			579

		Net cash provided by financing activities		6,855			87,724

Effect of exchange rate changes on cash and cash equivalent				1,932			18

Net change in cash and cash equivalents				54,118			45,174
Cash and cash equivalents, beginning of period				58,271			33,129

Cash and cash equivalents, end of period			$	112,389		$	78,303

Supplemental cash flow information
	Cash paid for interest		$	9,427		$	20,469
	Cash paid for taxes			11,632			3,418

See Notes to Condensed Consolidated Financial Statements

CHARLES RIVER LABORATORIES INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(dollars in thousands)

1. Basis of Presentation

The condensed consolidated interim financial statements are unaudited, and certain information and footnote disclosures related thereto normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying unaudited condensed consolidated financial statements were prepared following the same policies and procedures used in the preparation of the audited financial statements and reflect all adjustments (consisting of normal recurring adjustments) considered necessary to fairly state the financial position and results of operations of Charles River Laboratories International, Inc. ("the Company"). The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year. These condensed consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 29, 2001.

Certain amounts in the prior year financial statements and related notes have been reclassified to conform with current year presentation.

2. Long Term Debt

On September 26, 2002, the Company terminated the revolving credit facility. As of the termination date, there were no amounts due under the revolving credit facility. The Company recorded an extraordinary loss before tax of $613 due to the write-off of deferred financing costs. The extraordinary loss was recorded in the condensed consolidated statement of income net of a tax benefit of $236. The Company had $4,958 under letters of credit outstanding as of September 28, 2002. As a result of the termination of the revolving credit facility, the Company was required to transfer $5,000 into a separate bank account to support outstanding letters of credit. This amount is reported as restricted cash in the accompanying condensed consolidated financial statements. On October 1, 2002, the Company signed a commitment letter for a $30,000 revolving line of credit through another bank.

On May 29, 2002, the Company repaid all of the outstanding senior secured term loan facilities, including $14,000 term loan A facility, $41,100 term loan B facility and $13,500 term loan C facility. The Company recorded an extraordinary loss before tax of $1,790 due to the write-off of deferred financing costs. The extraordinary loss was recorded in the condensed consolidated statement of income net of a tax benefit of $698.

On February 14, 2002, the Company completed a tender offer for $79,728 par value for all of the 13.5% senior subordinated notes. The Company recorded an extraordinary loss before tax of $27,479, due to the payment of premiums related to the early extinguishment of debt ($23,886), the write-off of deferred financing costs ($2,726) and issuance discounts ($867). The extraordinary loss was recorded in the condensed consolidated statement of income net of a tax benefit of $10,717.

On January 24, 2002, the Company issued $175,000 par value of senior convertible debentures through a private placement offering. On February 11, 2002, the Company issued an additional $10,000 par value of senior convertible debentures through the additional purchase option. The Company received approximately $179,450, net of underwriter discounts. The senior convertible debentures will accrue interest at an initial annual rate of 3.5%, payable semi-annually in arrears, beginning August 1, 2002. The senior convertible debentures will mature in 2022 and are convertible into shares of the Company's common stock at a conversion price of $38.87, subject to adjustment under certain

circumstances. On or after February 5, 2005, the Company may redeem for cash all or part of the debentures that have not been previously converted at the redemption prices set forth in the purchase agreement. Holders may require the Company to repurchase for cash all or part of their debentures on February 1, 2008, February 1, 2013 or February 1, 2017 at a price equal to 100% of the par value of the debentures plus accrued interest up to but not including the date of repurchase. In addition, upon a change in control of the Company occurring on or prior to February 1, 2022, each holder may require the Company to repurchase all or a portion of such holder's debentures for cash. The Company used a portion of the net proceeds from the senior convertible debenture offering to retire all of the 13.5% senior subordinated notes through the tender offer discussed above.

3. Business Acquisitions

During the third quarter of 2002, the Company amended the joint venture agreement for Charles River Mexico, which was accounted for under the equity method. The Company gained control over the operations from the date of the amendment. The Company's ownership percentage of 50.1% did not change as a result of this amendment and no additional contributions were made. The Company began consolidating the operations of Charles River Mexico from the date of the amendment. The interests of the outside joint venture partners have been recorded as minority interests, totaling $2,587, in the condensed consolidated balance sheet.

On June 7, 2002, Charles River Europe GmbH, a wholly owned subsidiary of Charles River Laboratories Inc., the Company's wholly owned subsidiary, acquired 100% of the voting equity interests of privately held Biological Laboratories Europe Limited ("BioLabs"). Consideration, including acquisition expenses, was $22,900, net of cash acquired of $2,998. The consideration consisted of $21,012 in cash and $1,888 in future payments, which are to be paid to certain former shareholders of BioLabs over a three year period. BioLabs, located in western Ireland, provides a broad range of services supporting the discovery, development and manufacturing of pharmaceutical, medical devices and animal and human health products. BioLabs was acquired to strengthen the Company's existing biomedical products and services segment by adding new capabilities to service the large and growing global animal health and medical device industry. The acquisition was recorded as a purchase business combination in accordance with Statement of Financial Accounting Standards No. 141, "Business Combinations". The Company consolidated the operations of BioLabs from the date of acquisition.

The purchase price allocation for BioLabs has not been completed, however, it is expected to be finalized by the end of fiscal year 2002. The preliminary allocation of the purchase price as of September 28, 2002 is as follows:

Current assets	$	1,473
Property, plant and equipment		7,612
Other non-current assets		70
Current liabilities		(1,724	)
Non-current liabilities		(1,372	)

Estimated fair value, net assets acquired		6,059
Goodwill and other intangibles acquired		16,841

Consideration, net of cash acquired	$	22,900

On January 8, 2001, Charles River Laboratories, Inc. ("CRL"), the Company's wholly owned subsidiary, purchased 100% of the common stock of Pathology Associates International Corporation ("PAI"). Consideration, including acquisition expenses, of $35,238 was paid with respect to this acquisition, consisting of $25,557 of cash and a $12,000 callable convertible note. This acquisition was recorded as a purchase business combination and CRL is consolidating the operations of PAI from the date of acquisition.

Effective February 27, 2001, CRL acquired Primedica Corporation ("Primedica") for consideration, including acquisition expenses, of $51,107. Consideration was comprised of $25,708 of cash, $16,375 of the Company's common stock and $9,024 in assumed debt. This acquisition was recorded as a purchase business combination and CRL consolidated the operations of Primedica from the date of acquisition.

On July 20, 2001, CRL purchased 100% of the common stock of Genetic Models, Inc. ("GMI") for cash consideration of $4,000. This acquisition was recorded as a purchase business combination in accordance with Statement of Financial Accounting Standards No. 141, "Business Combinations". The Company consolidated the operations of GMI from the date of acquisition.

The following selected unaudited pro forma consolidated results of operations are presented as if each of the acquisitions had occurred as of the beginning of fiscal year 2001 after giving effect to certain adjustments for the amortization of certain intangible assets, additional interest expense and related income tax effects. The pro forma data is for informational purposes only and does not necessarily reflect the results of operations had the companies operated as one during the period. No effect has been given for synergies, if any, that may have been realized through the acquisitions.

		Three Months Ended				Nine Months Ended
		September 28, 2002		September 29, 2001		September 28, 2002		September 29, 2001
		(as reported)
Net sales		$	141,364	$	126,252	$	415,712	$	360,140
Income before extraordinary item			18,908		11,911		51,094		29,889
Net income			18,531		10,627		32,863		26,785
Earnings per common share before extraordinary item
	Basic	$	0.42	$	0.28	$	1.15	$	0.78
	Diluted	$	0.39	$	0.26	$	1.06	$	0.71
Earnings per common share after extraordinary item
	Basic	$	0.41	$	0.25	$	0.74	$	0.70
	Diluted	$	0.38	$	0.23	$	0.70	$	0.64

Refer to Note 5 for further discussion of the method of computation of earnings per share.

4. Restructuring Charges

During the fourth quarter of 2001, the Company recorded a restructuring charge associated with the closing of a San Diego, California facility. Approximately 40 employees were terminated as a result of this action.

During the fourth quarter of 2000, the Company recorded a restructuring charge associated with the closing of a facility in France. During 2001, the Company recorded additional charges relating to the settlement of labor disputes which originated during the first quarter of 2001. Approximately 60 employees were terminated as a result of the restructuring.

A summary of the activities associated with the above restructuring charges and the related liabilities balance as of December 29, 2001 and September 28, 2002 are as follows:

	Employee Separations			Other			Total
December 29, 2001	$	1,350		$	339		$	1,689
Amounts paid		(1,033	)		(256	)		(1,289	)
Additional charges		—			76			76

September 28, 2002	$	317		$	159		$	476

The Company has closed both the San Diego facility and the French facility and expects the reserves to be fully utilized by the end of fiscal year 2002. All terminated employees had separated from the Company as of September 28, 2002.

5. Earnings per Share

Basic earnings per share for the three and nine month periods ended September 28, 2002 and September 29, 2001 were computed by dividing earnings available to common shareholders for these periods by the weighted average number of common shares outstanding in the respective periods.

The weighted average number of common shares outstanding in the three and nine month periods ended September 28, 2002 and September 29, 2001 have been adjusted to include common stock equivalents for the purpose of calculating diluted earnings per share before and after the extraordinary item for these periods.

Options for 43,900 and 12,525 shares of common stock were outstanding at September 28, 2002 and September 29, 2001, respectively, but were not included in computing diluted earnings per share in each of the respective three month periods because their exercise prices were greater than the average market price of the Company's common stock for the period and their effects were anti-dilutive.

Options for 83,875 and 732,600 shares of common stock were outstanding at September 28, 2002 and September 29, 2001, respectively, but were not included in computing diluted earnings per share in each of the respective nine month periods because their exercise prices were greater than the average market price of the Company's common stock for the period and their effects were anti-dilutive.